Joint Committee on Taxation Data Shows Federal Tax System Is Progressive

May 14, 2021

The Joint Committee on Taxation (JCT) recently released data on taxes paid at various levels of income, indicating the federal tax system is progressive, consistent with similar analysis by the Congressional Budget Office (CBO), and the Organisation for Economic Co-operation and Development (OECD).

The JCT found that the bottom 50 percent of taxpayers faced an average tax rate of 6.3 percent at the federal level, compared to an average tax rate of 32.9 percent for the top 0.01 percent of income earners.

The income tax is the most progressive aspect of the federal tax system, providing an effective tax rate of -2 percent for the bottom 50 percent of earners. The tax rate is negative for this group because they receive more benefits through refundable tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), than they pay in tax. By contrast, the top 0.01 percent faces a 29.5 percent effective average federal income tax rate.

The federal tax system is progressive overall. Are federal taxes progressive? Explore federal taxes and transfers data (federal taxes progressive and federal tax system progressive data)

Payroll taxes supporting Social Security and Medicare are regressive, as lower-income groups face higher average rates. The bottom 50 percent faces a 6.8 percent average payroll tax rate, while the top 0.01 percent’s average rate is just 0.08 percent. This is partly due to the wage cap on the 12.4 percent Social Security payroll tax, which is levied on wages up to $142,800. Overall, however, the progressivity of the income tax more than offsets the regressivity of the payroll tax.

The federal corporate income tax is borne by people across the income spectrum, including the bottom 50 percent of taxpayers. The bottom 50 percent faces an average corporate tax rate of 0.5 percent, as they either own shares of corporate stock that are lower in value, or they earn lower wages. Those in the 50th to 90th income percentiles face a 0.7 percent average corporate tax rate, while the top 0.01 percent’s average rate is 1.9 percent.

The JCT report also shows that once the federal tax and transfer system is accounted for, the income share of those in the bottom 50 percent has declined only slightly since 1960. The income share for those in the 50th to 90th percentile has remained stable over that time, and is largely unaffected by taxes and transfers.

The top 10 percent of the income distribution, however, experience lower income shares after taxes and transfers are accounted for. The top 1 percent’s income share drops from about 14 percent before taxes and transfers to about 9 percent after taxes and transfers are accounted for, illustrating the progressive and redistributive nature of the federal tax and transfer system. This is also consistent with analysis by the CBO.

The JCT’s analysis does not include state and local taxes, which tend to be less progressive than taxes at the federal level. However, other analysis includes state and local taxes and finds the overall tax system is still progressive. Before policymakers consider options to change the federal tax code, it is important to keep in mind the progressivity of the code as it currently exists.

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A refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit.

A payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 23.05 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.

The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to $2,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers.

The average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes.

The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority like the Internal Revenue Service (IRS), and can even generate a refund, with EITC amounts calculated on the basis of income and number of children.